Beijing Corporation has $5,000,000 in debt and $12,500,000 in total assets.If the debt carries an interest rate of 10%,and the stockholders are demanding a 17% rate of return,Beijing's cost of capital is:

Question

Quizplus · Accepted Answer

To calculate the cost of capital, we need to find the weighted average cost of debt and equity.

Cost of debt = 10%

Cost of equity = 17%

Weight of debt = Debt / Total assets = 5,000,000 / 12,500,000 = 0.4

Weight of equity = Equity / Total assets = (12,500,000 - 5,000,000) / 12,500,000 = 0.6

Using the weighted average formula:

Cost of capital = (Cost of debt x Weight of debt) + (Cost of equity x Weight of equity)

Cost of capital = (0.1 x 0.4) + (0.17 x 0.6) = 0.04 + 0.102 = 0.142 or 14.2%

Therefore, the answer is B) 14.2%.

Beijing Corporation Has $5,000,000 in Debt and $12,500,000 in Total